Thursday, August 7, 2008

Alloy Steel International Reports

Weaker than expected earnings for the June quarter (Alloy Steel's 10QSB). By "expected", I'm referring to the expectations of the investors who follow the stock on message boards. There is no analyst coverage, and the company hasn't given any revenue or earnings guidance. The share price will probably drop significantly today. Once I get a feel for where the bottom is, I may put in a limit order to buy more. I remain bullish on the business and its prospects, for the same reasons I cited in this post.

It's actually not trading so thinly today, with nearly 300k shares traded so far. And bid-ask spreads of only a penny or two suggest that liquidity isn't an issue.

The stock would have been down in any case with the sequential drop in earnings (though the y-o-y comps were good), but I'd venture that it is more volatile because of the lack of visibility regarding earnings (since the company doesn't guide and there's no analyst coverage). Had there been guidance and analyst coverage, the stock probably wouldn't have dropped as much as it has today (on the other hand, it probably wouldn't have gone up as much as it did after the previous quarter's positive earnings either).

In any case, looking back at my decisions on this one, I am comfortable with them. I liked the company and its prospects, so I bought the stock, at what seemed like a fair price. After buying it, I became more bullish on the company, and wanted to add more, but didn't buy more at a higher price. Today I bought more on the drop because I still like the company and its prospects.

In hindsight, I could have not bought any of the stock and waited until these earnings were released to buy them, but then if earnings went the other way, the stock would probably have run away from me like GHM did, and I'd be kicking myself now.

As I mentioned in a previous (and now quite timely) post, it's no fun when stocks go down after you buy them, but this is one I am content to hold, and perhaps buy more of.

Well well well...Just might get the opportunity I was looking for. If I hadn't bought SGAS already I'd probably open a position today. If it stays down here long enough then I'll scoop up some shares.

A side note: this is why I don't like buying microcaps after a runup, no matter how bright the (apparent) prospects. There are so many out there trying to get rich quick that they bail when things don't go their way immediately. No stock (especially microcaps) ever goes straight up uninterrupted which is why its always safer to buy after a correction. I'd probably be labeled one of those nasty "market-timing daytraders" on GF for saying that, but whatever.

Stockdocx the anonymous chicken: Their is a big difference between an inherently volotile small cap with great growth potential having a bad day than a giant Sallie Mae losing billions in market cap.

Good point about buying micro caps on dips (provided the investment thesis is still intact). That's essentially what you and I did with DSNY. Between the time I bought AYSI and today, there were a couple of spikes up in price, but no dips below where I bought it initially at $2.28. I could have waited until this earnings release to buy, which makes sense in hindsight, but as I mentioned above, if the earnings had been a positive surprise, I'd still be on the sidelines.

BTW, if you've written up SGAS, I'll be happy to post your write-up here.

Yeah, in no way was I knocking the purchase of AYSI when you did, more just making a general point. Whenever you have small caps with the price action of AYSI, the investors (many of which already sitting on a multibagger) have very high expectations and its far more likely the (young) company will not live up to the expectations consistently. When that inevitable periodic disappointment strikes is usually the best time to buy. Of course such short term price swings can't be the main factor in an investment descision, but it sure makes a good tiebreaker between two good prospects. imo.

Thanks for the offer Dave, I'll have to consider it. There's a reason(s) I don't have a blog myself yet though :) so I don't know if I'll actually get around to writing one. Its not too complicated a thesis, I think it has severe underexposure in the market, plus some uncertainty about a possible aquisition. But its a healthy company trading at a PE of 3 and a half and at 60% of book value. I think it should at least double within the next year, at which point I'll take out my original investment and ride the free shares.

Now that I typed all that out, I just might go ahead and do a full writeup if I have time after work. We'll see. Thanks again.

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